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I think I finally understand how inflation works after reading this snippet:

For example, let us take Richard Cantillon’s “Essay on Commerce” published in 1730, about 50 years prior to Adam Smith’s Wealth of Nations.

There is a chapter in Cantillon’s book entitled “On the increase and decrease in the quantity of hard money in a State.” Money was “hard” in 1730, and Cantillon discusses the effects of an increase in the quantity of gold.

Cantillon begins by saying:

“If Mines of gold or silver be found in a State and considerable quantities of minerals drawn from them, the Proprietors of these Mines, the Undertakers, and all those who work there, will not fail to increase their expenses in proportion to the wealth and profit they make: they will also lend at interest the sums of money which they have over and above what they need to spend.

All this money, whether lent or spent, will enter into circulation and will not fail to raise the price of products and merchandise in all the channels of circulation which it enters.”

But Cantillon does not stop here. He goes on to say who will lose and who will gain from this inflation. This is a very important point: that there will be losers too in this process. Cantillon refers to John Locke having “clearly seen that the abundance of money makes everything dear, but he has not considered how it does so. The great difficulty of this question consists in knowing in what way and in what proportion the increase of money raises prices.” It is Cantillon who was the first classical liberal to elucidate this process. He says:

“If the increase of actual money comes from Mines of gold or silver in the State the Owner of these Mines, the Adventurers, the Smelters, Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume in their households more Meat, Wine, or Beer than before, will accustom themselves to wear better cloaths, finer linen, to have better furnished Houses and other choicer commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses: all this increase of expense in Meat, Wine, Wool, etc. diminishes of necessity the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The altercations of the Market, or the demand for Meat, Wine, Wool, etc. being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more Land to produce them in another year: these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support their families on their wages.”

I stumbled upon Kevin Kelly’s page while reading Seth Godin’s blog and I highly recommend a look see. Kevin writes about technology – its evolution, its effect on society, its future. He writes with passion, I like his style!

“It is puzzling why a particular technology does not spread everywhere throughout the world once invented. Why didn’t the plow, for instance, or backstrap looms, or the buttress arch, or any number of thousands of ancient inventions spread to all parts of the world once they had been refined?”

…. “Technologies have a social dimension beyond their mere mechanical performance. We adopt new technologies largely because of what they do for us, but also in part because of what they mean to us. Often we refuse to adopt technology for the same reason: because of how the avoidance reinforces, or crafts our identity” ….

…”We should expect technology to continue to exhibit ethnic and social preferences. Groups or individuals will reject all kinds of technologically advanced innovations simply because. Because everyone else accepts them. Or because they clash with their self-conception. Because they don’t mind doing things with more effort. I know an author who writes science fiction books today in long hand. At least the first draft. Efficiency and productivity may, in the future, be seen as something to avoid.”

I found this excellent video (sorry for the link, they don’t have embedding) on a friends profile on Facebook. It walks us through the various forms of government, is peppered with pithy lines from great thinkers and in my opinion ought to be made compulsory viewing for school children.Growing up, I regarded “Civics” as a mighty boring subject that one must study by rote, to pass exams. That it is one of the bases of my way of life was beyond my comprehension at the time.

PS: Blogging has been slow since Facebook is where I spend most of my cybertime these days. With friends sharing links from all over the internet, methinks it is a great way to exercise some mental muscle.

PPS: Kid brother observed that most of my blog posts are peppered with ‘!’, so I decided to go on a crash diet. Voila, this post has none.